How embedded lending is changing the world of finance

Embedded finance has changed the banking industry beyond recognition in recent years. The bottom line is that it makes transactions far easier, faster and more efficient for all concerned.

Embedded finance is the integration of financial services directly into a business’s products and services via an application programming interface. This enables them to provide services such as banking, payments, lending and insurance, without the need to build their own financial infrastructure or be regulated as a financial entity.

By far the widest use of embedded finance is in payments and bank accounts. By using a company’s website or app, customers can make payments quickly, more safely and securely, without having to enter their credit card details, for example, the Uber app, which allows users to book and pay automatically at the end of their journey.

The next step in the evolution is lending. By integrating embedded finance with accounting packages, it enables lenders to offer instant loans to small and medium-sized enterprises (SMEs). Therefore, customers can access a loan from the company whose product or service they are using rather than having to apply for one from a bank or financial institution and then having to wait days for a decision.

The most common form of embedded lending is buy now, pay later (BNPL) schemes, such as Klarna. By integrating them with point of sale terminals, companies can provide customers with ready access to BNPL and other finance offers. Such is their popularity, that around 60% of consumers have used a BNPL scheme and spending in that area is projected to peak at more than $500 billion by 2027.

Benefits of embedded lending

There are a multitude of benefits to using embedded lending. Most importantly, it enables borrowers to access the services they need and buy products that they may not have been able to afford in a lump sum.

For providers, embedded lending enables them to expand their revenue streams. For example, they may be able to offer higher-end products or competitive rate payment plans for high-ticket items or services.

Embedded lending also drives greater customer satisfaction and loyalty, particularly if they have had a smooth and seamless experience. As a result, that reduces churn too, because the end user is happy with the product.

Downsides of embedded lending

Despite all the advantages that embedded lending brings, there are downsides to it too. The main one, from a borrower's standpoint, is the risk of taking on too many loans.

Given the increasing availability of credit, they may find themselves drawn to take out more, smaller loans. Over time the repayments on them can build up and they may find themselves in more debt than they planned for and therefore default on them.

Because the company that the borrower took the loan out with is their only contact point, rather than the lender that issued it, this makes it more difficult and means it takes longer to resolve any problems such as payment disputes. Also, that company isn’t a loans expert, so may not be able to address any questions or queries that arise.

This isn’t the case, however, for SMEs. That’s because very few lenders are able to offer white-labelled embedded lending solutions.

Embedded vs traditional lending

For so long, traditional lending has been the mainstay of the lending industry. Yet, given the time-consuming and inefficient manual processes involved in checking and approving loan applications, it has become almost obsolete.

But now all that has changed thanks to the advent of technology and lending 3.0 which enables lenders to use real-time data and artificial intelligence to make instant lending decisions. That, in turn, improves both their operational and financial efficiency, as well as customer outcomes.

That doesn’t mean, however, that banks and traditional lenders don’t have a key role to play in collaborating with fintech providers to offer these solutions. It’s also a prime opportunity for them to grow and diversify their customer base, and enter new markets that weren’t previously available or accessible to them.

Embedded lending is simply another step on the evolutionary chain, making the process easier and more efficient for the customer. Rather than go to the bank to ask for a loan, borrowers can now walk straight into a store or go online using their app or website to take one out.